Silver Got You Down? Credit Suisse Builds Income Alternative

By Brendan Conway

One of the knocks on precious metals is that silver or gold just sits there: It lacks investment attributes such as dividends, earnings or future growth prospects. These are some of the reasons the metals’ roles are inherently limited in most investors’ portfolios.

Credit Suisse (CS) today launched an exchange-traded note that attempts to change the equation by adding a stream of income — by turning to the options market.

The Silver Shares Covered Call ETN (SLVO) is built to deliver the returns of the iShares Silver Trust (SLV) plus a “covered call” program of selling monthly out-of-the-money call options on the iShares ETF. The exchange-traded note structure isn’t for everybody: You have to be comfortable with the issuer’s credit risk. But it’s often superior from a tax standpoint and the returns versus the index should be precise.

The other tradeoff: Selling call options grants other investors some of your upside. So if silver’s price soars, you’ll only participate in part of the gain.

But the covered-call strategy is pretty tried and true. For instance, the CBOE S&P 500 BuyWrite Index (BXM) was hitting all-time highs well before the S&P 500 (SPY), and after less steep of a fall in 2008-09. Whether the same pattern will hold true for more volatile metals, especially in what’s shaping up as an unusually volatile period, is worth watching.

Earlier this year CS built the Credit Suisse Gold Shares Covered Call ETN (GLDI), which takes the same approach to the SPDR Gold Trust (GLD), the biggest gold ETF.

“Precious metals investments do not typically provide any current income. For the GLDI and SLVO ETNs however, this is not the case,” Greg King, the bank’s head of exchange traded products, says in a release this morning. “Covered call strategies are designed to enhance yield in exchange for sacrificing part of the upside of an investment position.”

About Focus on Funds

As exchange-traded funds and other investing vehicles have ballooned in number, the task of figuring out what works well and what doesn’t has only gotten harder. Barrons.com’s Focus on Funds looks under the hood of ETFs, mutual funds and hedge funds for overlooked values, actionable ideas and the latest pitfalls for fund investors.

Chris Dieterich has covered the U.S. stock market for The Wall Street Journal and Dow Jones Newswires. He is a graduate of Regis University and the Missouri School of Journalism.